Trade and the Skill Premium in Developing Countries: The Role of Intermediate Goods and Some Evidence from Peru

The rise in income inequality in developing countries after trade liberalization has been a puzzle for trade theory, which predicts the opposite effect. The authors present a model with imported intermediate goods in which the relative wages of skilled labor can rise due to higher imports of inputs or due to skill-biased technological change. The evidence from Peru in the post-liberalization phase in the early 1990s supports the skilled-biased technological change hypothesis. The authors find that most of the decrease in the blue-collar wage share in the manufacturing industries can be explained by the increase in machinery imports that followed liberalization, suggesting that the skilled-biased technology is embodied in imported machinery.

The authors thank Madeline Zavodny and the participants in the international trade workshop and the development studies seminar at Emory University for helpful comments and discussion. This research was supported in part by the University Research Committee of Emory University. The views expressed are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.